Which is better for the market, a thaw with China or data that shows the economy is slowing to the point that the Fed needs to be more prudent and less dogmatic with its rate hike philosophy?
How about when you get both?
That's what happened today, a one-two punch to the Kodiak that sent him reeling when he was beginning to pounce after two solid days
What was the grist for the bulls?
First, as you know, I have been saying bad news is good news now, bad news being any sign that the eight rate hikes the Fed has put through may be slowing down the economy enough that it doesn't need to panic and overshoot whatever targets are now being embraced.
At 10 o'clock we got a truly critical precursor to economic growth that verifies everything I have been hearing from the myriad companies I talk to. The Institute of Supply Management's Purchasing Managers Index, which measures the manufacturing sector growth, demonstrated that a real slowdown may have taken hold in the month of October. The index came in at 57.7 when the Street was looking for 59, the lowest reading since April. The new orders index fell 4.4 percentage points month over month and production fell 4% and the employment index dropped 2%. That's not the stuff of strength. Now, to be sure I favor a December rate hike because I want to be sure that the economy doesn't overheat. The raw materials index advanced 4.7% and that is too hot. However, during the month oil plummeted and wood and metals came down hard. I think that the lower oil prices are going to work their way through the system and I also believe that companies, if given the chance, will adapt to lower prices without you having to eat increases.
I believe that's likely to happen in the three months after the December rate hike and if that happens, the Fed would be ill-advised to move. These numbers are all of my theory that the Fed should be data dependent and if the Fed would be it would feel foolish making statements about the possibility of overshooting to slow down an economy. When you get the trajectory of the manufacturing economy slowing its rate of change upward that's a precursor to lower commodity prices.
Remember my thesis, slower data gives Jerome Powell some wiggle room to pause his hiking rather than overshoot and it also gives potential members of the workforce time to find a job. I believe the Fed shouldn't be saying 3.7% is full employment. I think that it should be saying we should allow this economy to absorb as many people as possible before things get too hot and we are simply not there yet, as these PMI figures show.
As positive as the PMI was for the overall market, the president's stunning tweet nine minutes later changed the complexion of the entire Nasdaq, which was beginning to swoon once again. "Just had a long and very good conversation with President Xi Jinping of China. We talked about many subjects with a heavy emphasis on trade. Those discussions are moving along nicely with meetings being scheduled at the G-20 in Argentina. Also had good discussion on North Korea."
Wowza: we have had a remarkable selloff in almost all of tech but the blast zone, the place where the nuclear bomb went off, was in the semis. That's because not only has business slowed, not only has Chinese intransigence hurt the group, but whole subsectors of the chips have not been able to rally after shortfalls as they usually would because there's a dearth of takeovers ever since the Chinese government blocked the Qualcomm (QCOM) , NXP Semi (NXPI) deal.
Talk about timing, we got NXP's numbers this very morning and there had been a ton of trepidation about them given that they are so linked to autos. Turns out that the linkage cut positively for them. Given the fact that they were once for sale and almost got $127.50 for shareholders, the $75 price it closed last night at seemed pretty darned cheap. A combination of the tweet and the earnings vaulted the darned thing six but that might not be the end of the move.
Of course, the semis trade as a unit because of the ETFs that encompass them so I don't need to tell you how they did. I just need to tell you that the semi index, or (SMH) , had been down for the year but they all caught a bid off the tweet heard round the world. One big standout worth mentioning: Micron (MU) with a stock that's virtually been cut in half because of a slowing in both flash and memory chips - they make both - and worries about a joint venture with a Chinese company - finally rallied almost 5%.
We also saw a nice run in companies that source in China, with Hasbro (HAS) first, and then Nike (NKE) being most emblematic. Gaming companies like Wynn (WYNN) with operations in Macau saw their stocks roar. I also liked the action in the semiconductor equipment stocks which have gigantic Chinese orders.
We've been saying that if the Fed or the president blinked in their wars against inflation and China you could have an up day. Given that we had been up about a thousand Dow points going into the session, a rally today is especially poignant and seems to justify the actions of bold souls who bought stocks, particularly tech stocks, and chose not to panic even as it seemed like such a good idea at the time.